Why You Should Invest In Cryptocurrencies
Bitcoin. Ethereum. Ripple. Litecoin.
All of these are terms that we seem to be hearing a lot about, especially in recent times.
What are they?
They are a part of a global phenomenon that is taking the world by storm – cryptocurrencies. They are actually just a handful among hundreds of cryptocurrencies that exist today and in which you can invest.
Cryptocurrencies can be thought of as digital money which can be used to make online transactions. Think of it like gold – invest a certain amount of hard cash in them, then sit back and wait for their prices to shoot up.
A simple glance at the bitcoin timeline can help one gauge the impact that it has had in the 21st century.
Turn back the clock to 2007 – the birth year of the Bitcoin.
- An anonymous entity who went by the name of “Satoshi Nakamoto” started working on the concept of the Bitcoin.
- In 2008, Satoshi published a white paper on peer-to-peer electronic cash transaction to solve the double spending problem, i.e., to prevent virtual money from being copied.
- At this point of time, its price was virtually less than a dollar.
The first transaction took place between Satoshi and a cryptography developer named Hal Finney.
- 2009 led to the Genesis Block, the very first block mined in bitcoin, where one dollar was equivalent to about 1300 bitcoin, according to the New Liberty Standard.
- This conversion was established by keeping the cost of electricity to run a computer generating bitcoin into consideration. Around the same point of time, a Norwegian man named Kristoffer Koch bought about $27 worth of bitcoin, and forgot all about them.
- Later, when he checked back on them, he discovered that their price had shot up to $886,000! (The Guardian)
By November 2010, there were more than one million dollars worth of bitcoins in circulation.
The value of a bitcoin was about $0.5 per bitcoin back then. For the first time in history, in February 2011, the bitcoin reached parity with the US dollar when the conversion rate was 1BTC=$31.
The rise continued, reaching $770 in 2016. In less than a year, the price went through the roof, reaching an all time high (at that point) of about $7500! (Hackernoon)
Image Source: buybitcoinworldwide
Transactions made using cryptocurrencies are designed to be secure and anonymous. Blockchains are essential in this regard.
- A cryptocurrency like the bitcoin uses a peer network for its transactions. This network of computers/nodes makes up a “Blockchain”.
- Every node receives a copy of the Blockchain, that is, a copy of all the transactions that have taken place.
- Whenever a new transaction is carried out, the Blockchain is updated across the millions of nodes around the world.
- All the blocks in the chain are linked to one another. This means that an attempt to tamper with the data in one block would require one to change the data in all the other ones which are linked to it.
Just like the name suggests, a cryptocurrency uses public key cryptography to make transactions secure.
- Every record that is written on a Blockchain ledger has a unique key that is associated with it.
- People, called “miners”, verify the transactions made via cryptocurrencies. They do this by solving complex math problems, and are rewarded through tokens such as bitcoins for doing the same.
- The computational-intensive nature of formation of a Bitcoin makes it virtually immune to forgery.
One of the most important benefits of using a cryptocurrency is that it cuts out the intervention of middlemen from the equation. There is no central authority which is in control of (most) cryptocurrencies, which makes them accessible to everyone. This is an unprecendeted model in today’s financial systems – one which hands back complete authority to the people over their money.
Cryptocurrencies such as Bitcoin are being increasingly recognized and accepted globally.
- They are not bound by exchange rates or transaction charges. This helps in saving time for determining the price for a particular transaction and fees associated with exchanging different currencies.
- You could even think of cryptocurrencies as universal currencies. Transactions are propagated almost instantaneously throughout the entire peer to peer network. So moving funds at international level via cryptocurrencies is easier and faster.
In the case of cryptocurrencies, you are the one who is in control of the amount that you own.
- Traditional monetary systems are based on “debt” and a system of “I owe you”.
- These systems, such as banks or credit unions, are partially in control of your funds, and may choose to suspend your account in case their terms are violated.
- In case of cryptocurrencies, you are in charge of your funds as there is no third party intervention (Unless, of course, you make your dealings with the help of a third party website such as Coindesk).
Cryptocurrencies are one of the most promising innovations of the 21st century.
- They provide a digitally safe, anonymous, and secure environment for making transactions which give one complete control over his or her funds.
- There is a certain amount of risk associated with the use of credit cards and cash-based transactions. Additionally, transaction costs, late fees and additional interest may be associated with them. Not to forget the danger of credit card fraud.
- The use of bitcoins has the potential to reduce the reliance on these traditional modes of payment.
An analyst – Kay Van-Peterson, predicts that the Bitcoin price could potentially shoot up to $100,000 in 10 years. His reasoning is supported by the fact that the price of bitcoin increased by a whopping 5000 percent in the year 2013 alone. It’s amazing how the price of a single bitcoin rose from less than a dollar to thousands of dollars, over a span of just 8 years!
Image Source: buybitcoinworldwide
- On the downside, just like the stock market, cryptocurrencies, as they operate along the same lines, are highly volatile. Their price may sharply increase by 20-30% within minutes or hours. On the other hand, it may plummet by the same or greater amount. This is because cryptocurrencies rely on the principles of demand and supply.
- Furthermore, the anonymity linked to the transactions via cryptocurrencies may be exploited by hackers and thieves.
Miners play a key role in the verification of such dealings:
- They are given adequate compensation for doing the same.
- On the other hand, no incentives are provided to those who run a node on the bitcoin network. Due to this, the number of nodes on the network has been decreasing.
- Another reason for this may be that it costs thousands of dollars to operate the hardware required to maintain these nodes.
- Plus, the collapse of Tokyo-based bitcoin exchange Mt. Gox in 2014, which led to a loss of more than 400 million dollars, has left many people apprehensive of this digital monetary system.
Just like a coin with two sides, cryptocurrencies have their pros and cons. When you talk about investments, there is always some sort of associated risk. Despite this, cryptocurrencies are increasingly being accepted all over the world. For instance – Virgin Galactic, a spaceflight company that lets tourists visit space has started accepting payments in the form of bitcoins.
The question of whether cryptocurrencies are here to stay can only be answered with time. But there is no doubt that its advent has completely changed the idea of online transactions.